Michael Harrison's Outlook: The financial services watchdog tears up its rulebook. But will it all end in tears?

Jowell's addiction to online gambling; Cenkos stock goes for broke

The box-ticker's charter that is the Financial Services Authority's rulebook is to be done away with in favour of a principles-based approach to regulation. Two cheers for that.

As this column has consistently argued, the FSA has been more of a force for good than bad since its inception six years ago, reinforcing London's attractions as a trading hub rather than driving business away. It is one reason why the FSA model is increasingly being copied by other regulators around the world.

The one notable exception, however, has been its policing of the retail financial services sector. The organisation's heavy-handed, rule-based approach has had the opposite of the desired effect, antagonising and confusing the firms it regulates without obviously improving the lot of the consumer. The nadir in the FSA's fortunes came when it was forced to recompense Legal & General for having originally fined it for endowment mis- selling. The episode demonstrated the extent to which the FSA's fixation with rules had drawn it down a confrontational and adversarial road.

So the announcement that the old rulebook is to be torn in half ought to represent good news. It should mean less prescription and less bureaucracy as the FSA finally evolves from its origins as an amalgam of several smaller watchdogs into one streamlined whole. It is part and parcel of the new approach brought to the FSA by its chief executive, John Tiner, who has strived to be more receptive to criticism from practitioners about the burden of regulation.

It just so happens that it also comes at the same time that the organisation is under the spotlight of the National Audit Office, which has been given a brief to examine how efficient the FSA is proving.

But the move to a principles-based regime is not without risk. The first is that it removes certainty from regulation. Whatever faults the old rulebook- approach may have had, it did at least cater for almost any eventuality. Henceforth, the compliance and regulation departments of banks and insurers will have to rely upon their interpretation of the principles being the same as that of the FSA.

Second, the regulator's own ability to operate according to the new ground rules will depend on the calibre of FSA compliance staff brought up on a diet of prescription, not principles. Shredding so many of the rules will require them to adapt at the same time as raising their game. John Tiner may be in tune with this nuanced approach and may be more the City's cup of tea, but what of his foot soldiers?

Third, the new approach will result in a reduction in FSA staffing at a time when those it regulates are putting more resources into compliance so they can cope with the increasingly esoteric products they handle and the welter of international rules.

So while the reaction yesterday of the financial services industry was one of guarded approval, the proof of the pudding will only come when the new regime has to handle its first scandal. Will the principles the FSA espouses today still be the same ones it applies a few years down the line? One man's principle can sometimes be another man's pratfall. Perhaps box-ticking is not quite so bad after all.

Jowell's addiction to online gambling

Until quite recently, a family I know lived in a splendid Victorian villa on the south coast. Unfortunately, one of their neighbours was an internet gambling addict. I say unfortunately because the wall of the main bedroom adjoined the study of the aforementioned addict next door. As a result, their sleep was regularly shattered in the early hours of the morning by loud whoops of delight, or more often a stream of obscenities, coming through the bedroom wall depending on how the cards had fallen. Unlike conventional betting shops, with their discreet blinds shielding the vulnerable and the impressionable from the activity taking place within, online gaming sites have no shutters and never close. Nor are they licensed in the same way as traditional casinos.

I do not know what Tessa Jowell's framework of global standards on internet gaming would have done to protect the sleep of my friends. But I do know that they have since moved home while their former neighbour presumably continues to indulge his nocturnal betting habit and presumably also continues to lose more often than he wins.

Yesterday the Culture Secretary invited her counterparts from more than 30 other countries to Royal Ascot race course, appropriately enough, to debate ways in which the online gaming industry could be regulated. The Americans, unsurprisingly, did not bother to turn up, having decided a fortnight ago to ban the activity outright.

The resulting communique from Ascot was the usual mix of apple pie and motherhood, containing commitments to rid remote gambling of crime, protect children and the vulnerable and promote ways of tackling problem gambling and addiction.

Ms Jowell's argument is that online gambling is here to stay. Therefore it is far better to regulate it rather than go down the US route of prohibition which will only drive the industry underground. The online gaming companies, still reeling from the ban imposed in their biggest market, could not agree more.

But how, precisely, can an industry that largely operates offshore be effectively regulated? From September next year, online gaming will be regulated in Britain by the Gaming Commission provided the operators are onshore. But what happens in Gibraltar and Antigua and any other offshore centre an online gaming site might select as its base?

That, says Ms Jowell, is where her global framework of regulation comes in - ensuring that all countries operate to the same high standards. Even so, tiny Caribbean states such as Antigua have every incentive to regulate internet gaming as lightly as possible for fear of driving it away. For these countries, it brings economic success but none of the social problems. Moreover, the responsibility for verifying the age of customers and deciding whether or not they fit the category of "vulnerable" will be left entirely to the online operators themselves. In some cases, effective enforcement of the regulation will rely bizarrely on problem gamblers voluntarily excluding themselves from sites.

There is more than a hint of protectionism in America's decision to ban online gaming outright and therefore help safeguard its large domestic gambling industry. But Ms Jowell is equally vulnerable to the accusation that her desire to regulate the market is driven as much by a need to keep the tax revenues rolling in as a desire to protect the public. The Government has already made a hash of super casinos. If it is not careful, its handling of the online gaming industry will go the same way.

Cenkos stock goes for broke

They say you should always leave something for the market. But what's this? A flotation that goes to a 44 per cent premium on its debut, and a stockbroking business to boot. Surely the selling shareholders in Cenkos Securities including Michael Marks, Paul Roy and Stephen Zimmerman of New Smith Capital - old hands at this game if ever there were - got legged over. On the other hand, Andy Stewart, who still retains a 24 per cent stake, is sitting pretty. And surely HSBC, the bank which handled the float, mis-priced the offer. As it happens, the New Smith trio had already done rather well, reaping a nine-fold profit on their initial investment in the space of a year. Nor has it been the best of times recently for small quoted stockbrokers. Perhaps they sold out at the right time. We shall see.

m.harrison@independent.co.uk